Articles

Bankruptcy trustee appears poised to sue former ITT brass

IBJ.com

By Greg Andrews January 14, 2017

ITT Educational Services Inc.’s bankruptcy trustee has launched a no-holds-barred investigation into the defunct company’s business practices—a move that appears likely to pave the way for her to sue former officers and directors, including CEO Kevin Modany and Chief Financial Officer Kevin Fitzpatrick.

Trustee Deborah Caruso could not be reached for comment, but attorneys representing her wrote in a filing: “The trustee believes that the estates have causes of action against certain of the debtors’ former directors and officers.”

In a separate statement issued Jan. 5, Caruso suggested a thicket of government litigation pending against the company and top executives could serve as a template for her own lawsuit.

Those cases include a 2014 predatory-lending lawsuit from the federal Consumer Financial Protection Bureau and a 2015 fraud suit from the U.S. Securities and Exchange Commission. That suit asserts that Modany and Fitzpatrick concealed from investors the “extraordinary failure” of two off-balance-sheet student loan programs and “routinely misled” its auditor on numerous fronts.

“The complaints filed by the states, the SEC and the CFPB are a road map, but the trustee has to travel down the road independently to make sure the claims are valid,” Caruso said in her statement.

Chasing insurance jackpot

A successful suit against Modany and Fitzpatrick, who earned millions leading the company, potentially could put their personal assets at risk. But the real pot of gold is directors-and-officers liability insurance coverage, court records show.

That coverage totals $40 million. In a side dispute that broke out in bankruptcy court, Caruso is trying to put government lawsuits on hold—in part to prevent executives from tapping that coverage for their defense costs, thereby depleting what she might be able to collect.

In all the litigation, ITT and top executives have denied wrongdoing. Asked to comment on the trustee’s plans to sue insiders, Modany’s attorney, Rachel Jaffe Mauceri of Morgan Lewis Bockius in Philadelphia, and Fitzpatrick’s attorney, Darren Azman of McDermott Will & Emery in New York, declined to comment.

The company dismissed its 8,000 employees and shut down its 130 ITT Technical Institutes in 38 states on Sept. 6—driven under by federal sanctions, including a prohibition against providing financial aid to new students. The government said it tightened the screws because it had “significant concerns about ITT’s administrative capacity, organizational integrity, financial viability and ability to serve students.”

In short, ITT was under unprecedented scrutiny over whether its expensive diplomas (a two-year associate’s degree ran some $45,000) were leaving students awash in debt while failing to properly prepare them for gainful employment.

Court records show that Caruso’s inquiry will include gathering documents and deposing personnel at PricewaterhouseCoopers, which was ITT’s auditor before quitting in 2014, and Deloitte & Touche, which stepped in as PwC’s successor.

‘Enormous task’

Caruso, a bankruptcy attorney with the Indianapolis law firm of Rubin & Levin, is trying to scrape together as large a recovery as possible for creditors—a challenge exacerbated by the reality that ITT has few assets beyond its real estate and equipment. In a filing in October, the company estimated it has assets of $389 million and liabilities of $1.1 billion.

“Resolving these claims is an enormous task for a company in a traditional restructuring, such as a retailer,” Caruso said in her statement, “but it is made even more complicated where there are several thousand potential student claimants—each with a unique, heartfelt story to tell—and no one left at ITT to verify their assertions, or assist in the response to the allegations.”

It’s not unusual for brass of a company to come under legal attack after it collapses. Last year, for instance, the Federal Deposit Insurance Corp. reached a $15 million settlement with three former officers of Columbus, Indiana-based Irwin Union Bank, which failed during the financial crisis.

The FDIC charged the trio “closed their eyes to known risks” in approving 19 loans that caused at least $42 million in losses. The executives admitted no wrongdoing, and all the settlement proceeds came from insurance coverage.